Ballmer, black turtlenecks, and Microsoft's next big idea

Comment Last week, we had two so-crazy-they-can't-be-true events that sent the internet into a tizzy. And both involved Apple and Microsoft.

First, word arrived that Microsoft chief executive Steve Ballmer would appear on stage with the God-like Steve Jobs at Apple's forthcoming World Wide Developer Conference in San Francisco, California. "OMG, this is too good to be true!" the world yelped. And, well, it was too good to be true, as Microsoft Tweeted later that day.

Second, Apple's market cap edged past Microsoft's, making it the single most valuable tech company and the second most valuable publicly-traded business after oil giant Exxon Mobile.

"OMG! Apple? With just 34,000 employees and its single-figure market share on the desktop?

"Doesn't Microsoft have an army of 100,000? Isn't it the maker of the world's most widely used PC operating system? Isn't Windows on 90 plus per cent of PCs? And, wait, didn't Microsoft give Apple a $150m cash injection in 1997 to help pull the then-ailing company - on hiatus from Steve Jobs and prior to the iMac/iBook - off the ropes?"

Oh, the irony! Bloggers and news sites nearly went rabid over this turnaround.

But let's put a damper on the hype. Attention fabois everywhere: Microsoft isn't so desperate that it needs to appear at an Apple developer conference. Is it less valuable than Apple? Maybe. But the answer isn't as straightforward as we've been led to believe.

Last year, in terms of revenue and profit, Microsoft was worth more than Apple. A trio of Microsoft's product divisions pulled in more dollars than Apple's entire business. Microsoft's Client division (home to Windows), the Server and Tools division (SQL Server and Exchange), and the Business division (Office) had combined sales of $46bn in the company's fiscal year ending June 2009, while Apple pulled in $36bn in sales across all operations for its 12 months ending August 2009.

Net income - that's profit - for Microsoft's three units was $28.2bn, versus $5.7bn for the whole of Apple. And at the end of 2009, Microsoft was sitting on $6bn in cash, versus Apple's $5.2bn.

This year, it’s looking like Apple will blow away Microsoft’s core businesses. Windows Client, Server and Tools, and the Business Division are shrinking, flat, or in single-digit growth for the first nine months of the company’s current fiscal year. Combined, the units have earned $20.6bn, compared with $22.3bn in the first nine months of last year.

And halfway into its year - boosted by the iPhone — Apple has reported that sales are nine billion dollars ahead of where they were this time last year. That's $29.1bn in revenues, and Apple's cash pile is now at $10bn, compared to Microsoft's $8.1bn.

But Apple may be susceptible to more fickle consumer buying habits, while Microsoft has the comfort of being embedded on business servers and PCs. That makes Windows, Office, SQL Server, and Exchange potentially more reliable earners. Office is certainly stable, pulling in a steady $14bn each year.

But this stability is also a problem. Stable businesses are like empires, impressively big in the present but doomed to fade. Microsoft’s big earners might be pulling in the billions today, but where’s the future growth? Interestingly, Windows Client sales and revenue are down 15 per cent and 18 per cent respectively for the first nine months of this year — despite the debut of Windows 7.

One reason for this might be Microsoft chief operating officer Kevin Turner’s decision to aggressively discount the new operating system to displace the company’s own Windows XP and beat the Mac and its seven-per-cent market share. If that’s the case, then Microsoft will hope the COO’s gamble of short-term loss for long-term market share pays off.

Beyond the core

Meanwhile, Microsoft is outside its core businesses, in new growth markets. This is where the company is being marked down, despite its size and safely predictable revenue.

Market-changing innovation has boosted the perception of Apple among investors. Plus, the company has turned new ideas into money.

Apple is in the midst of a successful run with the iPhone and now the iPad. People love them to the extent that the iPhone has carved out a quarter of the US smart phone market in less than three years. Moreover, with the iPod, iPhone and the iPad, Apple has - once again - shaken up incumbents. Handset makers, lazy carriers, PC makers, and, yes, Microsoft are rushing to offer multitouch phones and tablet devices.

What's more, Apple is its own PR machine. What does Apple need with PR when Steve Jobs can wage a one-man-war against Adobe Software's Flash that keeps everyone talking about the iPad?

On entertainment and devices, Microsoft's recent efforts to steal the magic of the iPod with the Zune fizzled, and the Zune got shuffled from device to online service, while the supposed iPad-rival Courier Tablet was canceled.

Tellingly, the head of the division responsible for Zune and Windows Mobile - president Robbie Bach - has submitted his resignation from Microsoft, while Zune brain and Xbox creator J Allard has left the company.

The biggest Microsoft buzz that's even remotely analogous to the iPhone is Windows Phone 7, but even there, Microsoft is following Apple. Windows Phone 7 comes after Steve Ballmer laughed off the iPhone, saying Microsoft made perfectly good phones. So good, in fact, that Windows Mobile has been losing market share to Apple and now Google's Android.

Microsoft is not just following on devices - it's also following on the internet. The company is spending more than it's getting from its Bing search engine in order to catch Google - the younger company it let get ahead. Such is the money being shoveled into Bing that Microsoft's Online Business is losing billions and hurting the company's overall performance.

On the cloud, Microsoft is spending billions of dollars and incurring delays in building its own software fabric and data centers to catch Amazon, the online book warehouse that set the gold standard for running hosted applications.

Let's be clear here. Microsoft has not stopped innovating. It has been doggedly refining Bing, for example, polishing its engine to bring in useful, related data associated with a search. Engineers and researchers in the corners of Redmond have also come up with some compelling ideas: the Silverlight media player was an afterthought to Windows Presentation Foundation (WPF), but now it's on the sharp end of the action against Adobe's Flash Player. Microsoft is also working on a browser/operating system codenamed Gazelle.

It's just that with so many of these projects, Microsoft is a follower not a leader. It's spending billions of dollars to catch percentage points of market share from Google or — worse — lose market share to Apple and Google’s Android in mobile. Meanwhile, Apple has the glow of success about it, becoming the company every handset and device wants to be.

To answer Apple's surge, Microsoft must recapture its old vision and then execute to grow significantly in new areas.

Microsoft has two potential options: the first is to buy its way into the game. In the cloud, for example, Microsoft could acquire a market share leader or idea maker and quit trying to build its own version of the wheel. The second option is harder: start the search for the next, really big idea in computing, put it into practice and have everybody follow it.